Is Level 3 Destined for Greatness?

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what Level 3 Communications' recent results tell us about its potential for future gains.

What the numbers tell you The graphs you're about to see tell Level 3's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always reported at a steady rate, we'll also look at how much Level 3's free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Level 3's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Level 3 managing its resources well? A company's return on equity should be improving, and its debt-to-equity ratio declining, if it's to earn our approval.

How we got here and where we're going Five out of seven passing grades is surprisingly good, but Level 3's managed to push its EPS in the right direction since the start of the year -- even though it remains in negative territory. The company's withering free cash flow levels are a major red flag, however. Level 3 needs to put forth some consistent gains if it hopes to hold onto this score, or even improve it, next year.

Akamai pulled ahead of its peers earlier this year when it put out the only positive earnings report of the trio. Delivering content has largely been a race to the bottom over the last few years, but hope springs eternal. Despite fierce competition and a history of unprofitability, Level 3's expected to post a far stronger growth rate next year than either Limelight or Akamai. One "super-investor" has faith in Level 3 -- Prem Watsa's Fairfax Financial has a large stake in the stock. I'd take this with a grain of salt, as Watsa's also doubling down on imploding Research In Motion.

Putting the pieces together Today, Level 3 has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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